If you’re thinking about opening a new ISA, it has probably never been so confusing. Low interest rates, bank account bonuses, rule changes and new types of ISA have all come along at the same time.
The point of an ISA is to earn interest on your savings, but as I wrote last month, the new Personal Savings Allowance will allow everyone earning under £43,000 a year to make £1,000 of interest and pay no tax on it.
Until now you’d pay 20% in tax on any interest not earned in an ISA, so the new rule could be worth £200 a year! For those who earn more than £43,000 the tax-free allowance drops to £500, which is still pretty sizeable.
So do you still need an ISA?
Cash ISAs vs Current Accounts
The biggest threat to ISAs are high-interest current accounts. The banks are all competing for your business and one way they try to get you is to offer interest rates as high as 5%.
With the best Cash ISA (one you can withdraw month from) offering just 1.4%, savings of £10,000 could be £310 better off in a series of those current accounts.
I’ve used £10,000 as an example, but even if you’ve got a lot less the difference is still noticeable.
On £2,000 you could earn £100 over a year with a top rated current account – £72 more than the best Cash ISA.
Even if you’ve only got £500, you’ll be better off by £18 a year with £25 interest rather than just £7.
The best current accounts for interest
My top picks for your savings are the Nationwide FlexDirect account which pays 2.5% on balances up to £2,500; TSB Classic Plus which has a rate of 5% on balances of up to £2,000 and the Club Lloyds which pays 4% on balances between £4,000 and £5,000.
Filling each of these up would total £9,500 and earn you £425 a year. With an extra £500 you could open a Flexclusive Regular Saver through your Nationwide account. That would make you an extra £25 a year, though you could keep paying in each month to earn even more.
Here’s how it adds up
Though these are my top picks for interest, there are plenty of others to choose from. Many have switching bonuses or offer cashback which might better suit you, so it’s worth looking at what’s on offer.
Each of these accounts will have terms and conditions such as minimum monthly deposits – these can easily be transferred between the accounts – and active Direct Debits. Some also have fees and interest rates that only last a year. So pick what works for you.
I’ve got eight current accounts for different reasons, and even for me they are starting to get a little confusing and difficult to manage, especially with all the different passwords and online banking systems! Unless you are happy with juggling so many, I’d say stick to just three or four different accounts.
Of course, if you’ve got more than £10,000 it starts to get a little more complicated.
You can put up to £20,000 in the Santander 123 account and get 3% back. I used to have one of these but switched away when they put the monthly fee up to £5 – though if you’ve the full £20k and use the account to get cashback on household bills, it still beats an ISA and would earn you £600 in interest.
But if you’ve filled up the four accounts I’ve mentioned here then you’ll have gone over the £1,000 personal savings allowance and will begin paying tax on the interest. Though you could still get more interest after tax than the best current ISAs, it’s definitely worth considering putting extra savings into an ISA.
Though you can only pay £15,240 into a ISA this financial year, once money is in a ISA it’ll keep earning tax-free interest each year, and this interest is on top of your personal savings allowance.
It’s also worth considering if you think you’ll get a pay rise this year that could push you into the 40% tax bracket. If that happens your personal savings allowance will be cut to £500.
Buying a house
If you’re saving for your first house, it changes things slightly.
Last Autumn the Help to Buy ISA launched. Halifax and Santander are offering 4% tax-free interest on your savings PLUS the government will give a 25% bonus on the balance when you buy the property.
It has limits – your first deposit can’t be more than £1,200 and then you can only save £200 a month. The property also has to cost under £250,000, or £450,000 in London.
In 2017 a new ISA will be available which does a similar thing. The Lifetime ISA will also offer a 25% bonus for first time buyers, or you can keep saving in it and get your bonus when you reach 60 years old. But these won’t be available for a year so aren’t really worth thinking about yet.
Another new ISA is the catchily named Innovative Finance ISA.
These are essentially peer-to-peer lending ISAs where you invest your money with the likes of Zopa and Funding Circle. Though these aren’t available until 6th April, you should be able to get higher interest rates here.
Likewise, anyone who wants to dabble in the stock market can open a Stocks & Shares ISA, where you’re return is based upon how well your investments do.
With both of these you’re swapping security for the chance of bigger returns. So if you can’t risk your savings or want a guaranteed rate of interest, you might want to give them a miss.